Cash for Clunkers 3

The final bill is linked to this post. The details below refer to an older bill.]The cash for clunkers proposal raises two moral hazard questions. One is whether people will fix up junked cars to trade in for the cash; if so, this may help the economy, but does little for reducing greenhouse gas emissions. The current Senate plan tries to minimize this effect by requiring that a car be registered for 120 days before being turned in.

The second moral hazard question is the degree to which improvements in fuel efficiency lead people to drive more (because driving is now less costly). If this "rebound effect" is large, it could wipe out most of the greenhouse gas benefit of replacing a clunker with a more efficient car. The MIT Technology Review reports:

"Some experts counter that the rebound effect is small. For one thing, there is a limit to how much more people will drive, regardless of how little they pay for gas. (Several estimates, based on data from past fuel-economy standards, suggest that for every 10 percent improvement in fuel economy, about 20 percent of the improvement, or two percentage points, is lost because people drive more.)"

The implication is that the actual carbon reduction will be close to the amount projected. For example, the move from 14 MPG to 25 MPG is projected to eliminate 3 tons of carbon dioxide over 10,000 miles; in effect, the replacement will tend to eliminate 2.4 tons of CO2 because the car owner will drive the new 25 MPG car more than 10,000 miles. That's still a big benefit in terms of GHG reduction.